Sourced from the major banks' own accounts, the graph shows net interest margins sliding from more than 3 per cent in the late 1990s to between 2 and 2.5 per cent in 2004, and staying there since.

"In aggregate the major banks’ funding costs are likely to have been little changed over recent months, " the report says.

"In terms of net interest margins, banks have recently reported mixed results; most have experienced a small decrease in margins, though some have experienced a small increase. In aggregate, the net interest marginof the major banks has fluctuated in a relatively narrow range since 2004."

As evidence banks are not feeling the pinch the Reserve reports some have begun "offering new borrowers larger discounts on housing loans"... and says they have cut rates on new 3-year and 5-year fixed mortgages.

Financial sector profits climbed 10 per cent this year "largely as a result of lower bad and doubtful debt charges and an increase in net interest income".

With the exception of resource companies the profits of the rest of the ASX 200 fell.

The Bank says the government is buying most of the bundled non-bank mortgages, suggesting that if it withdrew from the market the big banks would face very little competition.